How resilient really were emerging economies to the global crisis?

Pretty much like in any crisis of huge proportions, the real story of what happened during the global financial crisis is beginning to emerge after the dust has finally settled.

For Latin America and the Caribbean, the story is slightly different than what has previously been reported. Yes, the region weathered the recession well compared to other, emerging and developed, economies and resumed growth faster than many. But it didn't emerge from it largely unscathed as was initially suggested.

Contrary to current perceptions, emerging economies were hit by the global crisis as hard as developed countries. In response to such a large financial and real shock, most of the world economy came to a halt when the crisis hit. As the world economy collapsed, both emerging and developed economies witnessed declines in growth rates of a similar magnitude when compared to their pre-crisis growth rates.

In a recent research paper jointly-written with Constantino Hevia and Sergio Schmukler, we show that growth collapses, our proxy for cross-country performance defined as the percentage point difference in real GDP growth rates between 2007 and 2009, were in fact slightly larger in emerging countries relative to advanced countries, 6.9 versus 6 percentage points respectively.

By contrast, low-income countries suffered a smaller decline in GDP growth, of just 3.2 percentage points. Since emerging economies were growing at a higher rate before the crisis, they continued to do so afterwards, which might have prompted many to conclude that they were more resilient to it.

Globalization seems to be the "culprit" here. Unlike several estimates, it was difficult for emerging countries to decouple from the world economy at the same time that they were part of the global production system, used foreign funds to finance investments, and held assets abroad.

Any significant collapse of the global demand and in the financial centers was likely to get transmitted to countries linked to them. Emerging economies fell in this category. On the other hand, these transmission channels through trade and finance might likely explain the better performance of low-income countries, which were typically less connected to the epicenters of the crisis.

On the bright side, while emerging economies were not able to avoid the fallout from the economic collapse, they grew at a higher rate during the post-crisis, relative to before and, as usual, relative to advanced countries. Moreover, we also show that emerging economies started the recovery faster, returning to their higher growth rates.

For a bit of perspective, take a look at the most recent growth forecast for the region: it shows that Latin America is expected to grow 4-5 percent of GDP percent annually, similar to the East Asia Tigers.

A faster recovery of industrial production in emerging economies can be partly explained by a recomposition of inventories, which were initially depleted and needed restocking once it became obvious that the world economy would eventually stop its freefall. Nevertheless, there has been significant heterogeneity among developing countries with those in Eastern Europe and Central Asia faring much worse than emerging Asian countries. The performance of Latin American countries was somewhere in between these two regions.

More importantly, emerging economies were indeed more resilient this time around relative to their own past, though not so much relative to developed countries. During the global crisis, emerging economies were able to become more similar to developed countries and did not magnify the external shock.

While in the past emerging economies would fall more than developed countries, with the financial system and the public sector amplifying the shock due to their weak stances, this time the two groups of countries fell similarly.

There was a big game changer this time around, though. Emerging economies were prepared and able to use a wide range of countercyclical policies, which might have helped soften the negative effects of the crisis. For instance, many emerging countries had fiscal space and the required credibility to conduct expansionary fiscal and monetary policies, even larger than those in several advanced countries. By way of example, Argentina spent double than France, Germany or the United Kingdom in fiscal discretionary measures in 2009-2010.

While these tools have been available to developed countries for a long time, they were not an option for emerging economies, which have their history of procyclicality of policies around turmoil episodes.

All this leads me to conclude that, contrary to previous crises episodes, the resilience of emerging economies to the 2008-09 crisis can be at least in part attributed to a combination of sounder macroeconomic and financial policy frameworks and a shift towards safer domestic and international financial stances.